Pensions are often one of the largest assets in an estate, yet many people are unsure what happens to their retirement savings when they die. The rules can be confusing, especially as different types of pensions offer different death benefits and tax treatments. Understanding your options and planning ahead can make a real difference to your loved ones.

Types of Pensions and Death Benefits

There are three main types of pensions to consider:

• Defined Benefit (Final Salary) Pensions: These usually provide a pension for your spouse or civil partner after your death, and sometimes a lump sum if you die within a certain period after retirement. The rules are set by the scheme, so benefits can vary widely. Unmarried partners and dependent children may also be eligible, but this is not guaranteed.

• Defined Contribution Pensions (including SIPPs and personal pensions): These are more flexible. On death, the remaining fund can be paid as a lump sum, used to provide an income for your beneficiaries, or left invested for them to draw down as needed. You can usually nominate anyone as a beneficiary, not just family.

• State Pension: The State Pension offers limited death benefits, mainly for spouses or civil partners. There is no lump sum or ongoing pension for other beneficiaries.

Inheritance Tax and Pensions

One of the biggest advantages of pensions in estate planning is that most pension death benefits are not counted as part of your estate for Inheritance Tax (IHT). This means your pension can often be passed on free of IHT, unlike other assets such as property or savings.

• If you die before age 75: Most defined contribution pension benefits can be paid to your beneficiaries tax-free, whether as a lump sum or as income.

• If you die after age 75: Your beneficiaries will pay income tax at their own rate on any withdrawals from the pension fund.

Defined benefit pensions may pay a lump sum, which could be subject to IHT if it is paid to your estate rather than directly to a beneficiary.

The Importance of Nomination Forms

Pension providers usually ask you to complete an “expression of wish” or nomination form, stating who you would like to receive your pension benefits. While not legally binding, these forms guide the pension trustees, who have discretion over how benefits are paid. If you do not complete a nomination, or if your wishes are out of date, the trustees may pay benefits to someone you did not intend.

Planning Strategies

• Keep your nomination forms up to date: Review them after major life events such as marriage, divorce, or the birth of a child.

• Consider trust planning: If your family situation is complex, you may want to nominate a trust as the beneficiary, giving you more control over how benefits are used.

• Flexible drawdown options: Many modern pensions allow beneficiaries to leave funds invested and draw down as needed, rather than taking a lump sum.

• Annuity protection: If you have bought an annuity, check if it includes a guarantee period or value protection, which can provide ongoing payments to your beneficiaries.

Key Considerations and Pitfalls

• Trustees’ discretion: Pension trustees are not bound by your nomination, but clear instructions make it more likely your wishes will be followed.

• Tax implications: If you die after age 75, your beneficiaries will pay income tax on withdrawals, which can affect how and when they access the funds.

• Blended families: If you have remarried or have children from different relationships, take extra care to ensure your nominations reflect your wishes.

• Lost pensions: Keep a record of all your pension schemes and make sure your family knows where to find the details.

Final Thoughts

Pension death benefits can be a powerful part of your estate plan, but only if you take the time to nominate beneficiaries and review your arrangements regularly. With the right planning, you can help ensure your retirement savings go to the people you choose, in the most tax-efficient way possible.

Feel less anxious and more confident:
Caira is your new bestie! 👱🏼‍♀️🌸 Get answers and drafts in seconds for public, family, probate, conveyancing, criminal, employment, medical negligence, commercial and public law. All backed by 10,000 legal documents for England and Wales.

Upload documents, screenshots and photos for even more relevant responses. Free 14 days trial in 1min – no credit card required, afterwards just £15/month on our website. Continue chatting now. https://www.unwildered.co.uk

Disclaimer: This blog post provides general information for educational purposes only. It is not legal advice. Outcomes can vary based on your personal circumstances.